price_of_citizenship.jpg (9774 bytes) The Price of Citizenship

Chapter Seven

Chapter Seven: The Private Welfare State and the End of Paternalism

In America a cast system of work-related benefits complements the social welfare delivered by public authorities, private charities, and social services. Largely a product of the years since World War II, the private welfare state has given many American workers and their families unprecedented security during illness and old age. Always a privilege, never a right, the benefits of the private welfare state have proved more fragile and, even, reversible than many had supposed. Just as welfare reform was an attempt to increase individual responsibility by reducing dependence on the state, the emerging benefits strategy has pushed workers toward greater self-reliance by weaning them from dependence on employers.

Origins of the Private Welfare State

Employers hoped pensions would reduce labour turnover, which was extraordinarily high, and prune older and less productive employees from the workforce.

In 1929 fewer than 4% of men employed in industry and fewer than 3% of women had worked long enough at a single firm to qualify. The benefits themselves remained insecure, subject to reduction or elimination and unprotected from inflation.

Pensions spread more quickly in the public sector as city governments tried to clear urban workforces of older, allegedly incompetent members. The national government, for its part, promoted the spread of pensions with tax incentives.

With fears of radicalism enhanced after World War 1, the introduction of welfare measures into work accelerated during the 1920s, and welfare capitalism shifted away from social, educational, and athletic programs and toward programs with financial incentives, such as insurance and pensions, that male bread winners "earned". In the process, men replaced women as the majority of the beneficiaries of welfare capitalism.

Workers responded to welfare capitalism with ambivalence. Organized labor in the 1920s clearly loathed private welfare work, which it correctly perceived to be in large part an effort to win workers loyalty away from unions.

Although the Depression appeared to kill welfare capitalism, it "did not die, but instead went underground - out of the public eye and beyond academic scrutiny - where it would reshape itself". With company unions outlawed, collective bargaining required by public policy, and the rudiments of a federal welfare state in place, welfare capitalism reconstituted itself as a system of employee benefits that supplemented Social Security. By the late 1940s, America's distinctive public/private welfare state had emerged, now supported by organized labor and large employers.

The number of firms offering pensions and health or accident insurance climbed surprisingly in the early years of the Depression and then multiplied by the mid-1940s. One reason lay in the remarkable fiscal stability of the insurance industry, which managed to honor its pension liabilities even during the Depression.

The reorganization of the pension industry... firms sponsoring pensions turned away from the large insurance companies that had dominated the industry. Looking for lower costs and greater flexibility, they began to insure their own risks and to make their own design and investment decisions. In the process, they turned increasingly to new firms that offered professional benefits management. The results left pension funds financially vulnerable - insufficiently funded, tied to the prosperity and persistence of individual firms, and open to abuse, manipulation, and, sometimes, corruption.

In the 1950s and 1960s, federal officials would have accepted a trade-off: lower private pensions for higher Social Security. Unions, however, balked at this alternative and cut their own deals with business for higher pensions. Organized labor's determined pursuit of the mixed-benefit strategy made it impossible to mount an effort to win universal public benefits or redistributed taxes. The creation of a private welfare state divided "the American working class into a unionized segment, which until recently enjoyed an almost West European level of social welfare protection, and a growing group - predominately young, minority, and female - who were left out in the cold.

The private welfare state not only dampened organized labor's drive for expanded public benefits and divided the working class; it fueled blue-collar resentment toward people supported by state welfare or public assistance.

For nearly four decades the private welfare state provided a majority of American workers and their families with unprecedented security undreamed of by earlier generations. Few understood its foundation in employer self-interest rather than worker entitlement or foresaw its fragility - or how evanescent the moment of security would seem.

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The Scale of the Private Welfare State

The private welfare state is vast. The sheer size of the private welfare state has transformed worker compensation and economic security in the years since W.W.II. Although, American workers have always financed a large share of their own security, the balance shifted between 1960 and 1980. In the 1960s, individual workers contributed more to their benefits than employers did; by 1980 the situation had reversed, and employers contributed by far the largest share. As a percentage of total compensation, employee benefits grew from 8% in 1960 to 18% in 1993.

As a result of massive infusions of money into retirement accounts, pension funds have an enormous influence on the national economy. According to one estimate, pension plans hold about one-quarter of retired wealth. About 3/4s of this wealth remains in private pension plans, with the rest held by plans in the public sector.

In the United States, employee benefits emerge from a partnership among businesses, government, and individuals and is highly regulated by government. The major legislation shaping the framework for private pensions is the 1974 Employment Retirement Income Security Act (ERISA).

The federal government heavily subsidizes retirement, health care, and economic security. Despite the web of regulations surrounding it, the private welfare state remains decentralized, complex, and sometimes chaotic. No central structure of regulations governs benefits; instead, regulators respond to problems on a piece-meal basis. A new benefits industry of experts, counselors, and consultants has emerged "to lobby and interfere with government regulators and lawmakers".

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Trends in the Private Welfare State     

Historically, progressive employers practiced welfare capitalism to increase worker loyalty and decrease labor turnover. Pensions were not very portable; layoffs put them at risk. They were designed for employers who wanted to hold the same workers for many years and for employees who built long-term careers with the same firms. This system made less sense in the new global economy. In a ironic twist of history, many employers now looked to benefits to facilitate short-term employment.

The design of benefit plans also responded to corporate culture. Organizations with network cultures - "highly flexible, innovative, and transitory" companies that partnered with other firms for specific purposes - offered the least and most flexible benefits and oriented them to the short-term, consistent with the short-term focus of each venture.

Forces reshaping the national and world economy joined with demographic trends to drive changes in the private welfare state.

Part-time employment, which frequently offered no benefits, also increased about 10% from 1973 to 1995. Union membership, the best guarantee of benefits, declined from about 30% of the workforce in 1950 to just under 25% in 1973 and 14.5% in 1996.

Where workers once had bargained over wages and improved benefits, in the 1980s and 1990s they increasingly negotiated over the rollback of the private welfare state - concessions in wages, benefits, and work rules. With unions weak, many employers took advantage of their freedom to redesign pensions and health care benefits at will. "Welcome to the increasingly Darwinian world of reduced expectations." I am less than optimistic that most baby boomers will retire in relative financial comfort given the substitution of relatively less generous pension plans, reduced job tenure, increasing life expectancy, and high retiree medical and long-term care costs."

By the mid-1990s, unions had begun to shift their primary interest from wages and health benefits - the key issues of the previous decade - to pensions.

Between 1965 and 1985, the proportion of men from ages 55-64 in the labor force plummeted from 85% to 66%. With these trends, retirement benefits loomed as an increasingly sensitive and important issue for both the private and public welfare states.

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The End of Paternalism

The world of work is changing, employers are schooling employees in the end of paternalism and an end to the entitlement mentality. This pattern will not reverse.

As they constructed smaller, more flexible workforces, employers redesigned   benefits to suit mobile workers likely to change jobs several times during the course of their careers. To save money and enforce individual responsibility, they also shifted some of the costs of benefits to workers.

The shift from defined benefit to defined contribution pensions reflected these changes. Employers emphasized controlling costs and "maintaining 'flexibility' in managing their workforces." Defined contribution plans met these objectives better than did defined benefit plans, with their "associated entitlement fostering mentality." Defined benefit plans, moreover, proved "dysfunctional" because as employees' salaries rose, their value to the company declined after long years of service. Defined contributions also suited "corporate mergers, acquisitions, and divestitures" better than did conventional pensions. In theory, defined contribution plans benefit both employers and workers. They release employers from managing and funding their own pension plans, and they increase the portability of pensions for workers who change jobs. Unions, objecting to cost-shifting onto employees and worried about the potential hardship from poor investment decisions, vigorously oppose defined contribution plans. Employees often prefer defined benefit plans because they guarantee a check for life.

Defined contribution plans have subjected workers to the uncertainties of the market from which pensions had been designed in part to shield them. Like any market based strategy, defined contribution plans have shifted both the potential risks and rewards.

Employers have shifted the cost of health care as well as pensions to their employees. In only a few years, employers have accelerated the movement of Americans into managed care (PPOs - which consist of networks of physicians, rather than in conventional HMOs (Health Maintenance Organizations)), which employ their own staffs.

Retired workers over the age of 65 also faced Medicare premiums with less help from their former employers. Former employees were retiring earlier and living longer, and insurance companies were raising premiums.

Increasingly, employers swept away the remaining vestiges of paternalism by outsourcing the administration of employee benefits and corporate "human relations". Many employers looked "outside the company to consultant insurance companies and mutual funds for assistance in administrating benefits".

Outsourcing proved attractive because it promised to both redefine relations between employers and employees and reduce costs and administrative headaches. Outsourcing allowed companies to concentrate on their "core business" and to speed up shifts in employee benefit design and administration to match the accelerating pace of business change.

Outsourcing constricts the relation between employer and employee to narrow interactions around jobs; it reduces the dependence inherent in paternalism and devolves responsibility to outside specialists; and it redesigns the administration of employee benefits and human resources on a market model.

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The End of Paternalism in Action

Historically, companies had "done too much of the planning" for its employees. Now it provided "flexible benefits with a financial planning program as an option for employees." As in any market-based  transaction, risk had entered the new employment relation. "We see the new employment relationship like a river. The organization is dynamic, not static, with some people thriving on the fast pace, some keeping up with the flow, and some not able to keep up and being left behind. There is stability within the entity, but it is not stagnant; it is dynamic."

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Paternalism reinforced the idea that benefits were entitlements, undermined individual initiative and responsibility, and drove costs to unacceptable levels. Governors, by time-limiting welfare, and corporate leaders, by redesigning benefits, proposed to force individuals to take charge of their lives - which meant treating them as adults, not children, and binding them with mutual obligations. New obligations reflected a market model: state governments and businesses tried to narrow the scope of their relationships with clients or employees by outsourcing the administration of benefits; wherever possible they turned to managed care or internal competition to increase efficiency and cut costs.

Governors had seized the initiative in welfare reform and used waivers of federal law to redesign state public assistance. Employers had cut back the employee benefits that had expanded in the years after W.W.II and remodeled those that remained. They also had undertaken the vigorous reeducation of American workers to depend more on themselves and the market than on the paternalism of their employers. The end of paternalism helped employers design flexible new strategies for competition in the global marketplace; it also left employees increasingly vulnerable to the insecurities of unemployment, sickness, and old age.

Chapter Summary

Just as welfare reform was an attempt to increase individual responsibility by reducing dependence on the state, the emerging benefits strategy has pushed workers toward greater self-reliance by weaning them from dependence on employers. Employers had cut back the employee benefits that had expanded in the years after W.W.II and remodeled those that remained. The end of paternalism helped employers design flexible new strategies for competition in the global marketplace; it also left employees increasingly vulnerable to the insecurities of unemployment, sickness, and old age.

Back to Table of Contents/ . . .